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Thailand's GDP forecast at 5.5%

Consumer spending in the automobile industry and the property sector has been helping drive the...

Consumer spending in the automobile industry and the property sector has been helping drive the Thai economy. The banking industry has been restructuring and the government has been spending on infrastructure. Economic forecasts for this year have been upgraded.

Tapan Datta, director of emerging markets economics and strategy at Schroders, says: 'The macroeconomic backdrop has been one of the strongest growth stories in Asia.'

Thailand's economy has been growing at a faster rate than any other Asian country.

The government has raised its GDP growth forecast for this year to 5.5%, faster than last year's 5.2% increase.

Datta expects growth to be around 4%-5%. He says the automobile industry has improved because capacity has been built up and labour costs are low.

It is expected the production of cars and pick-up trucks will increase by 70% by 2006. Companies such as Honda Motor and Toyota Motor are planning to move their automobile plants to the South-East Asian nation as demand increases.

Demand for new homes is also strong, with property developers selling houses as fast as they are put on the market. For example, in one week, developer Asian Property received bookings for 120 of the 150 units it put on sale in Bangkok.

According to Datta, low interest rates have fuelled consumer spending. The banking industry has taken some steps to reduce costs. Loan demand has grown and there has been a gradual deceleration in non-performing loans. Thai banks have been cutting their lending rates to stimulate loan growth.

But Philip Eharmann, head of pacific and emerging markets at Gartmore, has a different view. He says: 'Loan growth in Thailand is only small. If interest rates come down, bank margins come under pressure. Consumers are being financed from a relatively high savings growth.'

But Eharmann agrees a lot of work has gone into re-capitalising the banking sector and improving balance sheets. The government has been investing in restructuring the economy.

One area the government is working on is improving the country's infrastructure by building roads and airports.

To help increase domestic demand, prime minister Thaksin Shinawatra has lifted government spending and cut taxes to overcome Thailand's dependence on exports.

'The export industry, such as electronic manufacturing, remains competitive with the rest of Asia, although China and India are giving it a run for its money,' says Eharmann. 'Thaksin understands transparency issues have caused problems in the country. Corporate governance remains a problem.'

For example, Thai industrial holdings company, TPI Polene, went bankrupt. The company owes $1.15bn and needs $180m to pay debt. One director has had a strong influence on the ministry of finance, which has caused corporate governance and transparency issues to emerge. These types of corporate governance issues need to be improved.

According to Eharmann, for foreigners to invest in Thailand the government has to work towards making it a more open economy.

There was some concern after the Sars crisis that it would impact on the economy. Thailand has a big tourist industry and Sars has caused tourist numbers to decline. It is possible the crisis may have an impact on second quarter GDP figures.

However, Eharmann thinks the impact will be less significant than originally thought.

Thaksin has been buying rice and other commodities at above-market prices to help boost local consumption and put money into farmers' pockets. This was to help protect the economy following the Sars crisis and the slowdown in tourism.

Another concern has been over privatisation. Datta says: 'The privatisation of companies has been on the slow front and reflects unrealistic expectations.'

Eharmann thinks privatisation of companies should help the economy. For example, the government is planning to privatise the state-owned Electricity Generating Authority of Thailand to help improve balance sheets.